Fraud Rarely Punished on Small Business Contracts
By Pamela A. MacLean
wswire21.org / Redwood Age
December 30, 2010
The government has long had the power to prosecute big companies for fraud for going after lucrative contracts meant for small businesses. But it rarely does.
Workers send blood through pneumatic tubes. (Translogic Photo)
Though hundreds of millions of dollars in government contracts have been diverted to huge corporations without penalty, prosecutions are rare.
A Newswire21 investigation found that despite the complaints of small business owners and the government's own watchdog reports, tens of millions of dollars in contracts annually pad the revenues of big companies, many belonging to Fortune 500 companies.
In 2008, for example, the Government Accountability Office looked at a small sample of Interior Department contracts and found $5.7 million going to firms such as Home Depot, John Deere, Dell and Sherwin Williams.
In March, the GAO found 14 firms received $325 million in sole-source and set-aside contracts [intended for minorities, women and veterans]. The GAO reported, "most were obtained through fraudulent schemes."
A year earlier, the GAO found 19 companies improperly received $30 million in federal contracts intended for small firms in low-income neighborhoods. SBA officials said they were "reengineering" the program to make it more efficient. The GAO concluded the SBA did not have effective fraud-fighting measures.
In a separate $4 billion program intended to help disabled veterans, a 2009 GAO study found at least $100 million going to companies that weren't entitled to it due to fraud and abuse. Yet the Small Business Administration didn't examine whether there was intent to defraud the government.
"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud," the GAO report concluded.
The rules for what constitutes a small business are complex and vary from industry to industry. The size of manufacturers, for example, may be based on number of employees, while retailers have a different standard, according to Joe Swain, a Small Business Administration spokesman. That said, small businesses are often considered those that are privately run and have fewer than 500 employees.
Congress mandated 30 years ago that 23 percent of federal prime contracts go to qualified small businesses, and the SBA tracks how each government agency performs in meeting that goal.
One business owner who has complained about large firms muscling in on small business contracts is Fred Valerino Sr., chairman of Pevco International Systems Inc., a Baltimore firm that makes pneumatic distribution tubes for hospitals and pharmacies.
Valerino, who has 90 employees, discovered his competitor, Translogic Corp., won 147 federal contracts between 2003 and 2008. It had applied as a small business with 280 employees and $8 million in annual business, although it was a subsidiary of the major Swiss firm, Swisslog Holding AG, with 2,000 employees.
Last year, Valerino complained to the SBA. "I got back a response that they would turn it over to the Veterans Administration," which awarded the contracts, he said. The VA told Valerino that Translogic's status was "miscoded" and removed the firm from the VA's tally of contracts awarded to small businesses.
The removal of Translogic from the VA tally worsened the agency's small business contract performance, but did nothing to help Valerino. Translogic faced no punishment or loss of existing contracts, despite its lack of qualification as a small business, Valerino said. The SBA dropped the matter.
"SBA only focused on the VA. They didn't reopen the inquiry," said Valerino. "All the contracts were completed and executed. I saw no evidence of corrective action, no slap on the wrist."
"We lost millions and millions of dollars in opportunities. There is no justice here," he said.
Swain claims the SBA has become more aggressive in its monitoring under the Obama Administration. "If we find data that a company is not eligible [for contracts], and intentionally misrepresented themselves we will work with the Inspector General and the Department of Justice," he said. He declined to comment on the Translogic case.
In recent years, the SBA has suspended only one firm from federal contracts over similar allegations of improperly claiming contracts intended for small businesses. GTSI, a technology systems integrator in Herndon, Va., was suspended Oct. 1. But the SBA didn't move quickly.
GTSI acknowledged in Securities and Exchange Commission documents from 1969 that, "As a result of the acquisition of the BTG Division in Feb. 1998, GTSI no longer qualifies as a small business for contract awards after February 1998." Yet the company remains among the top 50 governor contractors, with nearly $1.2 billion in federal small business contracts between fiscal years 2004 and 2010, according to the American Small Business League (ASBL).
Less than three weeks after the Oct. 1 suspension the SBA lifted the order after striking a deal with the contractor. "Now that the SBA has lifted the suspension we are looking forward to getting back to helping our customers meet their mission," the company said in a statement. It declined Newswire21's request for further comment.
"The fact that SBA waited almost 12 years to suspend GTSI after they admitted that they were not a small business, is proof they are assisting these large firms in high-jacking small business contracts," said ASBL founder Lloyd Chapman.
Chapman said his group reviewed the top 100 recipients of federal small business contracts for fiscal year 2009 and found 60 were large firms, which received nearly 65 percent of the total dollars the government said were awarded to small businesses. For example, he said Colt Defense, the large publicly-traded weapons company with 1,000 employees, had 166 federal contracts in 2009 for $122 million, of which $88 million were awarded as "small business" contracts.
See Part 1: Big Muscle in Small Business